Ark Asset Management Co., an RIA from 1989 through early 2009, when it withdrew its registration, was charged with fraudulent trade allocation, disclosure and books and records violations from 2000 through 2003.  A now-deceased portfolio manager engaged in fraudulent trade allocation practices – “cherry-picking” - by favoring prop accounts over client accounts in the allocation of securities - realizing at least $19 million of ill-gotten gains. 

The fraudulent allocation practice led to other violations:  (i) Ark, originally the investment management arm of Shearson Lehman Brothers, never disclosed this practice to clients;  (ii) it filed materially misleading Forms ADV, that noted the firm's stated goal to be “fundamentally fair” in the allocation of securities;  (iii) it violated books and records rules by failing to make and keep true and accurate order memoranda.

NorthStar (Proprietary) Funds.   A set of hedge funds created by Ark in 2000, in which certain Ark employees had ownership interests.  In December 2003, the Portfolio Manager responsible for trading for both NorthStar and the Client Accounts left Ark and created a separate entity, NorthStar Capital Funds, LLC, which took over the management of the NorthStar Funds.

Specialty Growth (Client) Accounts.   A certain set of advisory accounts created by Ark in 1986 and managed using a growth strategy.

From the time it was launched in 2000, the proprietary funds were run by the same portfolio manager who had sole trading authority over client accounts.  Both the prop funds and client accounts engaged in day-trading and investing in IPO's.  The portfolio manager often traded the same securities for the prop fund and client accounts.

Shortly after the prop funds were launched, the portfolio manager began to cherry-pick transactions, favoring the prop funds.  He did this by delaying allocation of the purchases and sales until after the order had been filled and the price of the security had been obtained.  Sometimes the portfolio manager waited until the end of the day to make allocations.  . The Portfolio Manager allocated mostly favorable trades to the Proprietary accounts and allocated a significantly lower percentage of favorable trades to the Client accounts even though the Client accounts were legally and financially able to engage in the trades that were disproportionately allocated to the Proprietary accounts.

The SEC complaint goes on to explain how trade tickets weren't marked with the allocation method.  It also notes that officers and directors of Ark knew about the disparity in performance between the prop funds and the client accounts.  Directors and officers were informed at board meetings throughout the period about the performance of the Client accounts.  Further, many of Ark’s officers and directors were investors in the prop funds and thus knew about the performance of the prop funds.

To settle the SEC charges, Ark agreed to be disgorged of $19.8 million.  However, in view of the limited assets available in the Ark estate, the SEC will accept payment of $750,000.  It should be noted that the firm ceased operations on 2/27/09, and sold substantially all of its assets.   [Admin Proceeding 3-13714, 9/29]